nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒01‒24
seven papers chosen by
Martin Berka
Massey University

  1. The Benefit of Exchange Rate Flexibility, Trade Openness and Extensive Margin By Kanda Naknoi
  2. The contribution of domestic, regional, and international factors to Latin America’s business cycle. By Melisso Boschi; Alessandro Girardi
  3. Exchange rate pass-through in the global economy – the role of emerging market economies By Bussière, Matthieu; Peltonen, Tuomas
  4. External constraint and financial crises with balance sheet effects. By Meixing DAI
  5. Economic integration and industrial sector fluctuations: evidence from Italy By Tatiana Cesaroni
  6. A Small Open Economy DSGE Model for Pakistan By Haider, Adnan; Khan, Safdar Ullah
  7. India's Approach to Capital Account Liberalization By Prasad, Eswar

  1. By: Kanda Naknoi
    Abstract: The literature on optimum currency areas argues that in the presence of countryspecific real shocks, the cost of fixing exchange rates is decreasing in the degree of trade openness. This study uses a stochastic dynamic general equilibrium model of endogenous specialization to assess the benefit of exchange rate flexibility. The benefit of exchange rate flexibility consists of the benefit along the extensive margin through adjustment in the composition of trade, and the benefit along the intensive margin through adjustment in the relative prices. Openness is found to influence these two benefits differently. Thus, the model predicts a non-monotonic relationship between openness and the benefit of exchange rate flexibility.
    Keywords: Exchange rate regimes, Trade costs, Openness
    JEL: F41 F42
    Date: 2008–11
  2. By: Melisso Boschi (University of Perugia and Centre for Applied Macroeconomic Analysis (CAMA)); Alessandro Girardi (ISAE - Institute for Studies and Economic Analyses and University of Rome Tor Vergata)
    Abstract: This paper quantifies the relative contribution of domestic, regional and international factors to the fluctuation of domestic output in six key Latin American (LA) countries: Argentina, Bolivia, Brazil, Chile, Mexico and Peru. Using quarterly data over the period 1980:1-2003:4, a multivariate, multi-country time series model was estimated to study the economic interdependence among LA countries and, in addition, between each of them and the three world largest industrial economies: the US, the Euro Area and Japan. Falsifying a common suspicion, it is shown that the proportion of LA countries’ domestic output variability explained by industrial countries’ factors is modest. By contrast, domestic and regional factors account for the main share of output variability at all simulation horizons. The implications for the choice of the exchange rate regime are also discussed.
    Keywords: International business cycle, Latin America, exchange rate regimes, Global VAR methodology, VEC models.
    JEL: C32 E32 F31 F41
    Date: 2008–11
  3. By: Bussière, Matthieu (BOFIT); Peltonen, Tuomas (BOFIT)
    Abstract: This paper estimates export and import price equations for 41 countries –including 28 emerging market economies. Further, it relates the estimated elasticities to structural factors and tests for statistical breaks in the relation between trade prices and exchange rates. Results indicate that (i) the elasticity of trade prices in emerging markets is sizeable, but not significantly higher than in advanced economies; (ii) such elasticity is primarily influenced by macroeconomic factors such as the exchange rate regime and the inflationary environment, although microeconomic factors such as product differentiation also play a role; (iii) export and import price elasticities tend to be strongly correlated across countries; (iv) pass-through to import prices has declined in some advanced economies, noticeably the United States; this is consistent with a rise in pricing-to-market in several EMEs and especially with a change in the geographical composition of U.S. imports.
    Keywords: emerging market economies; exchange rate pass-through; pricing-to-market; local and producer currency pricing; exchange rate regime
    JEL: F10 F30 F41
    Date: 2009–01–13
  4. By: Meixing DAI
    Abstract: This paper examines a model of financial and exchange crises with balance-sheet effects by explicitly taking account of wealth accumulation and external equilibrium condition. We have found that, in a general equilibrium analysis, there are two stationary equilibria. Since foreign debt is always zero at these equilibria, financial crises in emerging market economies cannot be interpreted as jumps between equilibria but between trajectories leading to one equilibrium or another one. The mechanisms of financial crises due to monsoon or spill-over effects are also analysed in this framework.
    Keywords: Financial crisis, exchange crisis, balance sheet effect, external solvency constraint.
    JEL: F31 F32 F41
    Date: 2009
  5. By: Tatiana Cesaroni (MEF)
    Abstract: This paper investigates the underlying sources of the Italian industrial sector fluctuations. It concentrates in particular on the role of different shocks on the manufacturing business cycle. To this end, it considers both domestic shocks (to hours worked and to technology) and external shocks (i.e. competitiveness and world trade shocks). The former concern internal conditions such as labour market and productivity dynamics; the latter relate to the effects of economic integration, globalization and the world economy scenario on the manufacturing sector performance. The findings show that although the cyclical fluctuations are mainly determined by productivity shock, hours worked and world trade shocks also contribute significantly to explaining the manufacturing business cycle.
    Keywords: Business cycle, Italian Industry performance,SVAR model, Economic integration, World trade
    JEL: C32 E32 F41
    Date: 2008–10
  6. By: Haider, Adnan; Khan, Safdar Ullah
    Abstract: This paper estimates a small open economy Dynamic Stochastic General Equilibrium (DSGE) model for Pakistan using Bayesian simulation approach. Model setup is based on new Keynesian framework, characterized by nominal rigidity in prices with habit formation in household’s consumption. The core objective is to study whether an estimated small open economy DSGE model provides a realistic behavior about the structure Pakistan economy with fully articulated description of the monetary policy transmission mechanism vis-à-vis domestic firm’s price setting behavior. To do so, we analyze the impulse responses of key macro variables; domestic inflation, imported inflation, output, consumption, interest rate, exchange rate, term of trade to different structural/exogenous shocks. From several interesting results, few are; (a) high inflation in Pakistan do not hit domestic consumption significantly; (b) Central bank of Pakistan responds to high inflation by increasing the policy rate by 100 to 200 bps; (c) exchange rate appreciates in both the cases of high domestic and imported inflation; (d) tight monetary policy stance helps to curb domestic inflation as well as imported inflation but appreciates exchange rate significantly (f) pass through of exchange rate to domestic inflation is very low; finally parameter value of domestic price stickiness shows that around 24 percent domestic firms do not re-optimize their prices which implies averaged price contract is about two quarters.
    Keywords: New-Keynesian economics; open economy DSGE models; nominal rigidities; monetary policy transmission mechanism; Bayesian Approach
    JEL: F37 E32 E52 F47 E47
    Date: 2008–11–06
  7. By: Prasad, Eswar (Cornell University)
    Abstract: In this paper, I analyze India's approach to capital account liberalization through the lens of the new literature on financial globalization. India's authorities have taken a cautious and calibrated path to capital account opening, which has served the economy well in terms of reducing its vulnerability to crises. By now, the capital account has become quite open and reversing this is not a viable option. Moreover, the remaining capital controls are rapidly becoming ineffective, making the debate about capital controls rather moot. Managing de facto financial integration into international capital markets and aligning domestic macroeconomic policies in a manner that maximizes the indirect benefits and reduces the risks is the key challenge now facing India's policymakers on this front.
    Keywords: India, international financial integration, capital flows, capital controls
    JEL: F3 F4 O2
    Date: 2009–01

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